Global Steel Trade; Structural Problems and Future Solutions

Foreign Investment. In the long term, Russia will be in direct competition for investment capital with
emerging markets throughout the world. 46 Thus far, foreign investment (all industries) in Russia has been
very limited, totaling under $20 billion (cumulative) through 1998. 47 On a per-capita basis, direct foreign
investment in Russia trails far behind Eastern Europe, especially Hungary and Czechoslovakia. 48 Factors
inhibiting foreign investment in Russia include political and economic instability; the lack of solid
corporate governance laws; and impractical trade, tax, and investment regulations. Reforms in each of
these areas are necessary for Russia to balance its risk/return profile (i.e., lower the risks to be
commensurate with potential returns) and foster foreign investment. 49
Survival Tactics
Despite all that has happened in the last decade and the need for real restructuring, no steel plants were
closed and no workers were laid off. 50 Although the Russian steel companies received little direct
government assistance, they were able to continue operating in an economic environment dominated by
barter, cheap inputs, unpaid taxes, wages and supplier bills, and weak bankruptcy laws. To the extent that
the domestic market did not absorb all the products that continued to be produced in this environment, steel
products were sold on the global market at soft prices. 51
Direct Government Assistance
In its 1993 plan, the government recognized that it could only provide 10 percent of the $7.4 billion
investment identified as needed over six years. Eighty percent would have to come from the companies and
the remaining 10 percent from other sources. 52 In the end, the government provided just over 2 percent of
the funds invested between 1992 and 1998. 53 Direct federal government outlays have been provided in the
form of tax breaks related to export sales, tax deductions for investment, lower customs duties and rail
rates, and in some instances, other tax benefits. 54
Although the amount of direct government outlays by the Russian government has been relatively
small, other formal, government assistance has been provided to the Russian steel companies. This
type of aid is generally not included in the assistance figures provided by the Russian government.
• The most prevalent kind of other assistance has been loan guarantees, which have been provided by the
federal government to several companies (i.e., Magnitogorsk, Oskol and Nosta). 55 Regional
governments have also been known to provide loan guarantees. 56
• Additionally, specific decrees have been issued that benefit particular companies undertaking certain
investment projects. For example, in 1997, Magnitogorsk began construction of a new cold-rolling mill.
The production from this mill was intended to replace imported cold-rolled sheet. To assist in the
construction of this mill, the government issued a decree which provided for tax deferrals, tax and
customs duty benefits on equipment imports, lower freight rates, and an exemption from the
requirement to exchange 75 percent of foreign currency earnings. 57
Input Pricing and the Story of “Tri Tolstyaka”
Although the amount of direct government outlays and loan guarantees by the government was not significant,
Russian steel companies benefitted from other forms of government assistance. Most important in this regard was
the pricing of gas, electric energy, freight and coal. The costs for these items were estimated in 1997 to account for
more than 50 percent of the cost of producing steel in Russia. 58 The gas, electric, and freight providers—which
remain government-owned or controlled companies—are often referred to as the “natural monopolies.”
In the 1993 steel development plan, the Russian government recognized the problem that deregulated
prices would cause:
48 Global Steel Trade: Structural Problems and Future Solutions